Bank united on rates policy

All nine members of the Bank of England's monetary policy committee voted to raise interest rates to 4% this month, minutes from meeting showed today.

MPC members agreed that a small increase was necessary in order to meet the Bank's inflation target of 2% by its two-year horizon.

The Bank said prospects for US growth seemed to be more assured, Asian economies were strengthening and there were clearer signs that the eurozone was beginning to recover. As for the UK, prospects for demand had strengthened, largely as a result of the "unexpected resilience" of household consumption.

"That would increase prospective inflationary pressure," the Bank minutes said.

This month's 0.25% rise was the Bank's second rate increase in three months. The Bank last increased borrowing costs in November, its first upward move for almost four years. It decided to hold rates steady in December and January to see whether November's decision had any dampening impact on consumption and the buoyant housing market.

But as the minutes noted, there was little change in the housing market in December with the rate of increase of house prices remaining strong that month.

There were also concerns that holding rates would surprise markets and lead to a fall in the pound, which was helping to dampen pressure on prices growth. The pound is currently trading at $1.91 - its highest level since just before Black Wednesday in September 1992, when sterling crashed out of the European exchange rate mechanism.

Some economists have argued that this will temper the need for future rate rises because of the downward pressure it will exert on growth and inflation, but some MPC members pointed out that the rise in sterling might turn out to be temporary.

Although inflation - currently at only 1.4% - is well below the Bank's 2% target, the the MPC stressed the importance of being pro-active.

"It was important that policy should be, and be seen to be, forward-looking, reacting to the prospective pressure of demand on supply capacity and the inflationary pressure associated with it, not simply to the current inflation rate," the minutes said.

Most analysts believe that the Bank will increase borrowing costs to around 5% late this year or early next year, although that will depend on how consumers react to its gradualist policy.

"The committee expressed uncertainty over the impact of rate increases given the current unusually high levels of consumer debt. The extent of future rate rises will therefore depend heavily on the impact of the rate increase on consumer behaviour observed in the coming months," said Ian Mitchell, senior economist at the Centre for Economics and Business Research.